If it seems like it was just two days ago that Goldman was writing about a Great-er moderation, and showing a chart of macro volatility - across virtually everything, not just stocks - reaching V-fib levels, it's because it was.
A lot has happened inbetween, most notably that volatility which just on Sunday night was left for dead, has made a stunning comeback, leading to another note published overnight by Goldman which breaks dramatically with the previous one, pointing out that not only did the S&P just have two consecutive 50bp+ selloffs for the first time since 2016, but that - at a time when the VIX is at a 5 month high despite the near-all time high in the S&P - January has been, on a realized vol basis, the most volatile month since Nov-2016.
Below are the detailed observations from Goldman's Rocky Fishman:
Largest drawdown in months. While hardly a sustained drawdown, the past two days' moves mark the largest selloff since August's 2.2% dip and the first time the SPX has sold off 50 bp or more on consecutive days since 2016 (by far the longest ever between two such events).
Strong VIX reaction. Monday's move drew an outsized reaction of the VIX, with the spot VIX rising 2.8 points on the 67bp S&P 500 selloff (typically the VIX would rise just over 1 point on such a move). The VIX moved less on Tuesday's larger S&P 500 move, but the still-large two-day 3.7 point VIX move leaves the VIX at a 5-month high.
Higher SPX realized volatility, large absolute moves, and higher cross-asset volatility are consistent with a higher VIX. January will end up being the most volatile month for the S&P 500 since the 2016 presidential election. A VIX in the 14's is reasonable given January's 9.9% realized volatility.
Furthermore, the current VIX level is on the low extreme when compared with periods when the S&P 500 has had a 7% one-month trading range. Increased volatility in rates, credit, and FX markets is also contributing to higher SPX implied vol.
Goldman's advice? The same as Morgan Stanley's: hedge before the drop, not after it.
SPX hedges remain good value; implied vol is not high in the context of recent realized. Implied volatility remains well below its historical average and at a reasonable premium to realised vol, and the SPX has traded in a wider range recently than other underlyings with higher implied volatility. Though its implied vol has risen, China stands out from this perspective: HSCEI puts are good value.
Although we see no catalyst for a near-term correction, substantial drawdowns within bull markets are not uncommon, so hedging is prudent. The increased implied vol level combined with a spot price that's still up substantially YTD points toward collars as our preferred zero-premium alternative to buying puts and put spreads.